Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2014, the first quarter of fiscal 2015. Unless otherwise noted, amounts are in millions of dollars; the filing reports financial figures in thousands. Comparisons are with the three months ended September 30, 2013.
Business context
Jack Henry provides banking and credit-union software, technology solutions, payment processing, implementation, support, and outsourced services. A substantial portion of revenue is recurring, including multi-year outsourcing contracts and maintenance agreements. The company reports Bank and Credit Union segments.
Financial performance
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $318.8 | $295.7 | +7.8% |
| Gross profit | $138.3 | $128.7 | +7% |
| Gross margin | 43% | 44% | Down about 1 percentage point |
| Operating income | $82.6 | $77.3 | +7% |
| Net income | $52.8 | $49.8 | +6% |
| Diluted EPS | $0.64 | $0.58 | +10% |
| Cash from operations | $93.1 | $97.7 | Down 5% |
Support and service revenue, 92% of total revenue, rose 8% to $292.5 million. Electronic payment services, outsourcing, and implementation services contributed to growth. License revenue increased 16% to $13.6 million; hardware revenue fell 11% to $12.8 million. Operating expenses rose 8% to $55.7 million, with higher personnel costs among the cited drivers. The effective tax rate increased to 36.0% from 35.5%, primarily because the Research and Experimentation Credit expired.
Bank segment revenue grew 9% to $240.8 million, with a 42% gross margin. Credit Union revenue grew 4% to $78.0 million, with a 46% gross margin, down slightly from the prior-year quarter.
Cash, debt, and liquidity
Cash and cash equivalents were $39.4 million at September 30, down from $70.4 million at June 30, 2014. Operating cash flow was $93.1 million. Investing activities used $42.9 million, including $21.5 million of capital expenditures, $18.0 million for software development, and $3.5 million for internal-use software. Financing activities used $81.2 million, including $60.5 million of treasury-stock purchases and $18.0 million of dividends.
Current assets were $302.1 million and current liabilities were $389.2 million, resulting in reported negative working capital of $87.0 million. Deferred revenue of $260.6 million was the largest current-liability component; management said the cash cost to fulfill the related services is substantially less than the recorded balance and reported no anticipated liquidity problem. Total debt and capital-lease obligations were approximately $11.0 million, primarily capital leases. No revolving-credit balance was outstanding; the company reported more than $150 million of available credit and compliance with covenants. Its $150 million revolving facility was scheduled to terminate June 4, 2015.
Changes, outlook, and notable items
- Management cited continued strength in recurring support and service revenue, a healthy sales pipeline, and customer demand for solutions addressing regulatory, operational, profitability, and efficiency needs. It expects outsourcing trends to support outsourcing revenue over the long term. The filing provides no specific revenue or earnings forecast.
- Fiscal 2015 capital expenditures were not expected to exceed $70 million, funded from operating cash flow. Management noted an overall expected decline in hardware sales as customers shift toward outsourcing and computer prices remain deflationary.
- The company repurchased about 1.049 million shares under its public plan for $60.5 million during the quarter. Remaining repurchase authorization was about 4.147 million shares. Dividends declared per share increased to $0.22 from $0.20.
- After quarter-end, the company sold its TeleWeb suite of Internet and mobile banking products; it expected an approximately $3 million after-tax gain in fiscal 2015’s second quarter.
- A patent-infringement case filed by DataTreasury in 2013 seeks damages, injunctive relief, and attorneys’ fees, including enhanced damages for alleged willful infringement. The company said it intends to defend the case; it could not reasonably estimate any possible loss or range.
- At September 30, gross unrecognized tax benefits were $8.2 million, including $5.6 million that would affect the effective tax rate if recognized. The company anticipated a potential $1.7–$2.3 million reduction within twelve months.
- The company acquired Banno in March 2014 for $27.9 million in cash. The preliminary allocation included $19.5 million of goodwill; management said the acquisition’s effect on the reported periods was immaterial.
Investor facts to verify
- Whether recurring support and service growth continues, and how outsourcing and electronic-payment activity develop.
- Whether gross-margin pressure and higher staffing and operating costs affect earnings as revenue grows.
- How planned capital spending, share repurchases, and dividends affect cash balances and liquidity.
- Progress on the DataTreasury litigation and any change in the company’s ability to estimate potential exposure.
- The realized gain and any other effects of the TeleWeb sale, as well as the final Banno purchase-price allocation.
- The timing and outcome of expected uncertain-tax-position adjustments and the company’s response to the new revenue-recognition standard.